Abstract
AbstractA nonperforming loan refers to a loan that is not paid as and when due, and it is a significant issue that banks need to keenly consider for them to exist and be stable. There are several factors accountable for nonperforming loans; some are firm‐specific, while others are macroeconomic factors. The study of banking sector stability is a foundation of modern macroeconomic policy of a bank‐based economy. In this view, this study aims to investigate the determining factors from both perspectives. This study used the dynamic panel regression analysis on 110 commercial banks from nine countries for the years 2010–2017 and a total of 880 observations were examined. The system generalized method of moments found that lagged nonperforming loan, lending rate, capital adequacy, credit growth, cost income ratio, as well as real interest rate, were the significant factors affecting nonperforming loans in lower middle‐income countries’ banking sector. Hence, it is recommended that commercial banks ought to establish regulations to amend their policies regarding credit advancement in alignment with the factors highlighted above. Also, banks need to ensure their loaned‐out funds are dedicated to the envisioned purpose via improved credit monitoring that would spur economic sustainability.
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